How to Benefit From a Managed Care Check-up.

Over the past year, the number of bankruptcies, insolvencies and receiverships among managed care organizations increased substantially -- and there's no compelling reason to believe MCOs' financial woes are over. More rigorous state regulations, the threat of federal health care legislation, the improved bargaining power of hospital and physician providers in some regions and class action lawsuits are having a substantial impact on the fiscal health of HMOs.

One of the MCOs' biggest problems is information systems. These systems were designed to process claims, not to handle the complex contracts that frequently were set up with providers such as doctors and hospitals. The health care industry has lagged behind others in improving the quality of its information systems. The result often is an inability to calculate and report financial data accurately and on a timely basis.

Yet despite the problems, in most situations HMOs deliver high-quality, affordable medical care. In a fee for service system, doctors are paid every time they provide a service, so some may have the incentive to do more than what could be considered medically necessary in the delivery of patient care. In the managed care environment, limits are set and standards are based on "medical best practices." Managed care organizations are monitored by the National Commission on Quality Assurance in Washington, D.C., which provides a level of oversight that traditional fee for service systems lack.

CFO Headaches

In this challenging environment, the last thing CFOs needs to learn is that one or more of the HMOs they work with are in deep fiscal trouble. Despite frustrations with HMOs, employees in many corporations become accustomed to a health care service provider and the benefits it offers. A last-minute change might trigger a mad scramble to find a new provider. Or it might substantially increase employee frustration with the current provider as it tries to juggle claims and financial problems simultaneously.

Therefore, it's critical that a CFO evaluate an MCO's health before signing up a new one or renewing an existing contract. This process requires more research than reviewing an HMO's balance sheet, because problems frequently are hidden in an HMO system. Take Harvard Pilgrim, for example. It was highly respected for the quality of its practitioners and the level of care they delivered. Harvard Pilgrim's problems largely came from an expansion plan during which it bought other health care organizations throughout New England. Through this expansion, HP inherited fiscal problems and antiquated information systems that eventually created huge losses.

Thus, before you sign a contract with an HMO, evaluate it in three categories: fiscal health, implementation of medical best practices and the ability to provide quality medical services.

Financial Health

Changes in provider demands and their own decision-making and operational capacity affect MCOs' financial health. Provider groups have become more aggressive in their contract negotiations with HMOs. Many providers either want to eliminate the capitation system -- which sets a uniform payment on specific services -- and return to the traditional fee-for-service system, or create a hybrid. The growth and integration of acquired businesses strain computer systems and operating procedures. As a result, they experience increasing medical and administrative costs. Some factors causing HMOs' financial difficulties include:

* Benefit structures that attract high-cost participants.

* Benefit structures and designs that are incompatible with existing internal information systems.

* High retroactive enrollment.

* Poor provider satisfaction, resulting in difficulties renegotiating contracts.

* Inadequate provider education regarding how to work within the managed care system.

* Backlogs in claims processing.

* Problems with antiquated information systems.

* Poor employee satisfaction.

* Inadequate capitalization.

To conduct a quick check of an HMO's financial health, pick up Standard & Poors' Sector Report on Healthcare, or call an investment bank or brokerage house and ask for a current analyst report. But reported financial information provides only part of the picture. Some data may be misstated through incurred but not reported information, resulting in under- or over-reported medical costs. Analysis of operational statistics from restated historical financial statements may give a more realistic picture of an MCO's problem areas.

Therefore, try to identify potential problems that may create sudden and unforeseen losses. For instance, one of the biggest MCO problem areas is incurred but unreported information, because there's often a substantial lag time on the claims-processing side. Provider claims come in, but the MCO may take several months to put them on the books. Or a patient claim under review may be booked as a potential liability but not reported as such. Some areas to examine are:

* Medical loss ratios (profitability indicators used to determine the percentage of premium required to cover medical costs). Traditionally, an MCO's medical loss ratio should be below the 90th percentile. If it's more than 100 percent, the organization clearly is in trouble. The lower the medical loss ratio, the better.

* Days in claims payable (how long the MCO holds provider payments). On average, these payments shouldn't be held longer than 45 days. But if the cycle is particularly long, say 90 days, it's an indication that the MCO is having both operational problems and difficulty meeting its financial obligations.

* Net worth per member (how much an individual member is worth to the MCO). The higher the number, the stronger the entity's solvency.

* Current ratio. The most commonly used measure of short-term solvency, it indicates the extent to which the claims of short-term creditors (i.e., providers) are covered by assets that can be converted to cash in a period roughly corresponding to the maturity of the claims. A current ratio of less than 1.0 indicates an organization isn't able to meet its obligations as they become due.

Medical Best Practices

Learn about the proactivity of your health plan vis-[grave{a}]-vis the Internet and computer-based information systems. Over the next few years, Web-based initiatives may dramatically improve the quality of medical care MCOs deliver to their corporate customers. Some programs to ask about are:

* Disease management. Many health plans employ disease management companies to develop a greater understanding of the patient populations they serve. Disease management firms analyze historic claims data (some also use laboratory, pharmaceutical and physician information) to determine the percentage of an employee population with chronic illnesses such as asthma, diabetes, heart disease or high blood pressure.

Once these individuals are identified, the disease management company can begin an initiative to improve the administration of their health care. These initiatives might include reminding diabetics about the importance of frequent eye exams or monitoring pregnant women to ensure that they take pre-natal vitamins. As health care becomes more Web-based, it wouldn't be unusual for an employee to receive an e-mail reminder that it's time for his or her annual check-up.

* Health care web sites for employees. Some health plans are working with Web-based companies to design sites that will give employees information on medical best practices. When an individual goes online today to become better educated about a particular illness, he or she receives a library of information that's not always understandable to a layperson. New Internet systems will link the patient, doctor, health plan, insurer and others involved in health care management to deliver customized information to patients on a timely basis.

* Educational outreach programs for doctors. Over the past year, there have been reports about the frequency of medical errors that cause serious harm. Some health plans work with consultants to identify doctors with a high percentage of chronically ill patients who suffer from specific illnesses. Then the health plan targets these physicians with educational seminars promoting medical best practices, current research and new treatments.

Quality and Performance

If employees are unhappy with the services their MCO delivers, you'll hear about it. The trouble is that many of these complaints come to office and benefits managers; the CFO hears about them second or third hand and can't get at the root of what really happened. But there are steps you can take to evaluate an MCO's performance before you sign a contract.

Look for approval from the National Commission on Quality Assurance, an industry watchdog that monitors members of the managed care industry. To receive NCQA accreditation, MCOs undergo a rigorous evaluation that includes an on-site review of the health plan's records, conducted in part by physicians.

You also may want to obtain the most recent HEDIS (Health Plan Employer Data and Information Set). HEDIS data are submitted and analyzed as part of the NCQA accreditation process by almost 90 percent of health plans. Data are collected on a national, regional and metropolitan basis, so you can compare statistics in the same locale from several different MCOs.

A HEDIS report will tell you about information system capabilities and plan stability. It ensures that the MCO has a place for collecting, storing, analyzing and reporting health care information. It also examines the MCO's ability to process medical, member and provider information, and measures plan member and provider satisfaction levels, as well as access to care and its availability and effectiveness.

In addition, ask the MCO about its readiness to comply with the new HIPAA regulations. The Health Insurance Portability and Accountability Act, enacted in 1996, addresses the administrative simplification, privacy and security of electronic medical records. Few MCOs have information systems capable of managing the changes it mandates. An MCO with antiquated systems may have to make a huge investment in HIPAA readiness that could mean problems with paying claims and higher charges to members.

Of course, it's impossible to be absolutely certain the managed care organizations you select will remain financially solvent and provide the levels of medical care and service your company will need over the long term. But if you do some preliminary research and ask the right questions, you can be assured of fewer surprises over the life of your contract. It also pays to distribute the risk by working with a couple of MCOs, so others can pick up your employees if one doesn't survive.

J. Mark Abernathy is a director of the health care practice group of Navigant Consulting Inc. in Tampa, Fla. He has over 20 years of experience in the health care industry, working with payers and providers on financial management issues, insurance services and practice and information and data management.